India’s Subsidy Regime and Dichotomy of Fiscal Prudence and Quantitative Easing

India is a welfare state with mounting poverty and marginalized sections in its population. Our policies are sustainable and more inclusive in nature. As a result more inclusive approach is read in the perspective of shielding the poorer and those who cannot afford from the market forces. But the paradox of fiscal prudence and quantitative ease always remain. The realization that the mounting subsidies may destabilize the economy comes after the macroeconomic numbers between 2011 and 2013. The fiscal deficit rose to 5.2% of the gross domestic product (GDP) because of high end petroleum and fertilizer subsidies.

Two important anchors need to be understood in this regard. One it is always easy to dole out subsidies in the economy but nearly impossible to remove, because of fear of backlash coming from the society of being anti-poor. Second with the coming of new political players in the arena and their populist manifestos made the economy more like a season sale in the consumables. The one who give more discounts would attract more.

Both the aspects are dangerous for the economy in the long-term. One throws the people in perpetual dependency without bettering their capability to earn and other straining the macroeconomic figures and destabilizing the economy in the long run making it less competitive in the global market.

Subsidy becomes a problem when it influences the prices in the market and as a result shifts the resource allocation. It was evident in the open ended petroleum subsidy which resulted in an increase in subsidy burden.

There are ample of evidence which shows that urea subsidy in the long run would reduce the yield. Similarly the subsidies in electricity facilitating the irrigation amounts to irrational exploitation of groundwater recharge as evident from the fields of Punjab and Haryana. This shows the misdirectional use of subsidies advantageous to those who do not need. The ill-governance throws the enormous opportunity of leakages which is evident in many government welfare programmes.

Goods of subsidies

But in a welfare state like ours it is almost impossible to look every move form economic angle. Subsidies are not always wasteful, when it reaches to the needy, it sustains humanity. When in incidences of natural calamities or morbidity due to disease it is the subsidized medication which saves lives. There are many such programmes by international organization and developed countries running in poor or underdeveloped countries which are doing just to the society by providing them subsidized commodities. Also even the developed economies provide subsidies to their export market as it gives them the competitiveness in the global market.

Public transport is subsidized in the urban areas so as to helps the urban commuters by providing cheap and efficient transportation mode. It also saves the fuel and controls the pollution and save environment. Delhi metro and Mumbai local are some incidences.

India remains the beneficiary of operation flood which utilized the European Economic Community’s dairy aid directing it to build capital intensive infrastructure of dairy cooperatives. It was speculated that it would make the country permanently dependent on aid and also disincentives the domestic producer. The money then was used to build the milk processing plants and developing the network of cooperatives, where farmers utilized the modern processing markets without paying for it.

This is the manifestation of economic use of subsidies that is required in the country. Similar is the case of developing the renewable energy infrastructure in the rural areas. The solar pumps and solar run batteries and utilities would reduce the consumption of fossil fuels at the same time provides a clean environment to the rural poor who otherwise would have paid for the heavy infrastructure cost.

At the same time targeted subsidies benefits the needy and hence initiatives like the direct benefit transfer linking it to the unique identity number needs to be fastracked.

Subsidy is both harmful as well as advantageous to the population, the need is to use it wisely.